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SEC Sues Silvergate Capital Over Misleading AML Claims and Risky FTX Transactions

The SEC has filed a lawsuit against Silvergate Capital, alleging misleading statements about anti-money laundering measures and risky transactions with FTX.
SEC sues Silvergate bank

The U.S. Securities and Exchange Commission (SEC) has officially filed a lawsuit against Silvergate Capital Corporation, a “crypto-friendly” bank that has gone bankrupt.

The SEC alleges that the bank made misleading public statements about its anti-money laundering measures and engaged in numerous transactions with FTX. The lawsuit also targets the bank’s executives, including CEO Alan Lane, former COO Kathleen Fraher, and former CFO Antonio Martino.

According to the SEC, Silvergate’s compliance program for the Bank Secrecy Act and anti-money laundering was ineffective. The agency claims the bank failed to implement adequate measures to monitor the Silvergate Exchange Network (SEN), allowing customers to conduct high-risk wire transfers.

“The bank did not sufficiently or automatically monitor suspicious activities involving approximately $1 trillion in banking transactions on SEN,” the SEC stated.

The agency also noted that Silvergate failed to detect nearly $9 billion in suspicious transfers by FTX and related entities.

On March 9, 2023, Silvergate voluntarily ceased operations and liquidated its assets due to the recent decline in the crypto market, which led to billions of dollars in deposits leaving the bank.

In a report to regulators, the La Jolla, California-based bank said, “In light of recent industry and regulatory developments, Silvergate believes that winding down the Bank’s operations and voluntarily liquidating the Bank is the best path forward.”

The news caused many crypto companies, previously Silvergate’s clients, to sever ties with the bank. As a result, they had to shut down the SEN, their crypto inter-exchange transfer network.

This also led to the collapse of several other banks associated with Silvergate.

Inspectors from the Federal Reserve have indicated that Silvergate’s collapse was due to its heavy reliance on the risky cryptocurrency sector. The Federal Reserve noted that Silvergate had become a single-industry bank, with most customer deposits being uninsured and non-interest bearing.

If Silvergate had complied with existing banking regulations, it would have had to apply for a new license with the Federal Reserve. However, government oversight agencies needed to exert more pressure to require them to establish new risk protection measures.

Silvergate’s overreliance on cryptocurrency became even more apparent after the collapse of the FTX crypto exchange in November 2022, which led to tens of billions of dollars fleeing the crypto industry in the following months.

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